Money conversations

Young Money Mistakes – Investing with an Investment Club

In the early 2000’s, a friend of a friend started an investment club. If you’re not familiar with the term, the SEC says:

An investment club is generally a group of people who pool their money to invest together.

To participate in the club, you would send him money each month. The group would choose and buy stocks. And ideally you’d make a profit.

Nothing could go wrong there, right?

At the time, I was in my early 20s. I knew I should be doing something with investing or stocks or the stock market, but I didn’t know what. Here was someone who supposedly knew; he was someone I liked and trusted, so I started sending him money every month. (I didn’t participate in the group otherwise and didn’t help choose the stocks.)

At some point I stopped sending him money and lost track of how much I had sent.

A few years later I got an email inquiring how much I had invested. The leader of the club was in trouble for embezzlement.

Email about investment club

Luckily I was able to figure out how much I had invested ($180) and recouped the money.

But, wow. So many mistakes.

Wrong, wrong, wrong

Mistake #1 — I abdicated responsibility for my finances to someone else

No one cares about your money as much as you do. I should have taken the time to learn more about the stock market and its role in my finances. There are tons of personal finance books (and now blogs and podcasts and Reddit and so much more) that there’s no excuse for not knowing! Not all of the information out there is good, but if you search and spend a little time, you’ll learn a lot.

Mistake #2 — It’s generally a bad idea to choose individual stocks

And it’s even worse to let someone else pick them for you.

There is a lot of risk with individual stocks — namely that the company could bomb and you’ll lose all of your money. You take that risk anytime you invest in stocks, but mutual funds (which are groups of stocks from various companies) lighten that risk. It’s always good to diversify to mitigate risk; they say not to put all of your eggs in one basket for a reason.

Check out this article from the Simple Dollar on Why I Don’t Recommend Individual Stock Picking. (J does have one individual stock which we use to compare to his ETF.)

Mistake #3 — I lost track of the money

I sent him money for awhile, but then forgot about it. What does that say about how I value money?

I’d like to say that when I recouped the money, I was so much better with it, but I wasn’t. It took many more years before I really got my shit together.

Mistake #4 — I mixed money and friendship

I’m a big proponent of talking about money and finances with family and friends (and the internet — check out an honest look at my finances), however I think everyone should be responsible for themselves.

There’s an expectation that you’ll get the money back when you lend money to a friend; when that doesn’t happen, the friendship can sour. If you see your friend spending money on other things instead of paying you back, it can hurt. Here’s a great story about lending money to a friend and how the friendship inevitably changed.

Mistakes aren’t always bad

Mistakes can be a great teacher — often much more impactful than someone just telling you what to do (or not do). The important part is that you learn from them.

In my case, it could have been a lot worse — I could have invested a LOT more or not been able to recoup the money. Either way I’m glad for the experience because I’ve been able to avoid these mistakes since then.

What kind of money mistakes have you made?

Leave a Reply

Your email address will not be published. Required fields are marked *